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by Darryl Wilkinson
I hear our President is ready to tackle tax reform. We need it.
Back in the 1980s, H.W. Bush famously described supply-side economics — the claim that cutting taxes on rich people will conjure up an economic miracle. They tried hard to make that work. Those with money are still trying, despite results that inspire the descriptive label of “Voodoo Economics.” Here’s a story I clipped and saved that illustrates how they think:
Suppose that every day 10 men go out for supper and the bill for all 10 comes to $100. If they paid the bill the way we pay our taxes, it would go something like this:
The first four men (poorest) would pay nothing.
The fifth man would pay $1.
The sixth man would pay $3.
The seventh man would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The 10th man (richest) would pay $59.
And that’s what they decided to do. The men ate at the local cafe every day and seemed quite happy with the arrangement. Then one day the cafe owner threw them a curve: “Since you’re all such good customers, I’m going to reduce the cost of your meals by $20 — so now you can all eat for just $80.”
Despite the change, the men decided they still wanted to pay the bill the way we pay our taxes. So…
All agreed the first four men were unaffected. But what about the other six men, the paying customers — how could they divide the $20 windfall so that everyone would get their “fair share?”
Simple math presented a problem, seeing how $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to eat his meal!
The cafe owner suggested another way to reduce each man’s bill by roughly the same amount.
The fifth man now would pay nothing, like the first four (100% savings).
The sixth man now paid $2 instead of $3 (33% savings).
The seventh man now paid $5 instead of $7 (28% savings).
The eighth man now paid $9 instead of $12 (25% savings).
The ninth man now paid $14 instead of $18 (22% savings).
The 10th man now paid $49 instead of $59 (16% savings).
Everyone was better off than before, and the first four continued to eat for free. But once outside the cafe, the men began to compare their savings.
The sixth man grumbled, “I only got a dollar out of the $20,” and pointing at the 10th man, “but he got $10!”
“Yeah, that’s right,” shouted the seventh man. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”
“Wait a minute!” the first four men yelled in unison. “We didn’t get anything at all. The system exploits the poor!”
So, the nine men surrounded the 10th man and beat him up.
The next night the 10th man didn’t show up for supper. So, the nine sat down and ate without him. When it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
This story is supposed to explain why people who pay the highest taxes get the most benefit from a tax reduction. Tax the rich too much, attack them for being wealthy, and they just may not show up (doing business in the USA) anymore.
I see that point. But remember, even in this context, the original premise of the richest paying $59 of the $100 bill and all “seemed quite happy with the arrangement.” My point is that tax relief shouldn’t ONLY be for the rich.
Instead of relaxing tax for just the rich, we’d do much better to curb excessive spending and concentrate on enacting policies aimed at sparking economic growth. That puts what’s best for the middle class as top priority. With growth, all things are possible.
We need tax reform. For little guys like me who struggle to show profit above payrolls, we need tax simplification and more confidence thinking everyone is paying a fair share.
Flat tax? Sales tax? Off shore tax shelters? Tax cuts to fuel growth? Tax imports? Tax exemptions? It seems everybody has a thought or idea, but nobody has clear answers. Certainly not the experts.
Look over across the state line to Kansas where Gov. Sam Brownback slashed taxes. His so-called “real live experiment” in conservative fiscal policy delivered a fiscal crisis.
Tax reform is much more than just hoping to pay less tax. I hope our President won’t repeat his health care experience, loudly deploring what we have while promising a better way only to pull away, whimpering “It’s a lot more complicated than anybody thought.”